Can European unicorns defend the high valuations? : a challenge of the post-money valuation approach

Abstract

We apply a DCF-based R-model on a sample of 12 European unicorns to show that postmoney valuations overstate the fair value of VC-backed companies. At best, the initial result suggests that the majority of the sample is overvalued whereas some firms are slightly undervalued. The median overvaluation of the sample is 25%. When we increase the conservative cost of capital estimates with one percentage point, all firms are overvalued with a median overvaluation of 75% in the sample. Our results indicate that many of the firms will need an abnormal operational improvement toward steady state in addition to significantly outperform the peer group and industry forecasts in order to generate cash flows that are sufficient to defend the post-money valuation.